Brooke’s Note: Before we published part one of this two-part series, Schwab gave us relatively terse replies — and all by e-mail — to inquiries about this case. After the piece was published, we still did not get any interviews but Sanders received a deluge of e-mailed information from Schwab. The story had not changed per se but Schwab grew more effusive in its laying out of alleged details of the case and just how determined it is to see Michael Kelly punished, even jailed.

Charles Schwab & Co. is currently seeking jail time and fines for Michael P. Kelly, an advisor terminated from its advisor platform in October 2011.

On Nov. 17, the custodian and discount brokerage filed an order to show cause for contempt of court with the Superior Court of Ventura County, Calif. Schwab claims Kelly recently violated a restraining order prohibiting him from contacting Schwab employees when he impersonated Craig Cross, co-founder of the Long Beach, Calif.-based RIA Halbert Hargrove Global Advisors LLC, in order to extract information from Schwab employees and affiliated RIAs. We have an inquiry in to Schwab about the nature of the evidence proving this impersonation. If Schwab’s spokesman responds, we’ll add it.

Kelly’s actions violated several criminal and civil statutes, Schwab’s spokesman wrote in an e-mail on Friday.

Schwab responds

As seen in Part 1 of this article, Kelly and his small, $14 million RIA, Airgead Clann LLC of Thousand Oaks, Calif., were terminated for an alleged instance of client impersonation on a phone call with Schwab’s compliance department.

Since his termination, Kelly has waged a largely unsuccessful three-year legal campaign against his former custodian. The case spent 13 months in front of FINRA before that self-regulatory body ultimately denied use of their forum to hear the arbitration. Next, the case went before the American Arbitration Association, where on Apr. 3 of this year, an arbitrator ruled in favor of Schwab.

Kelly is currently appealing the court confirmation of that decision on the grounds that Bernie Clark, executive vice-president and head of Schwab Advisor Services, perjured himself in a January deposition when he claimed the custodian’s compliance department does not consider profitability or size when judging whether or not to terminate an advisor.

'Unacceptable risk’

His appeal before California’s 2nd District Court of Appeal uses direct quotes spoken to the impersonated Craig Cross and claims to have information that puts Schwab dead to rights.

But the RIA industry’s biggest custodian isn’t taking the charges lying down. In an e-mail to RIABiz on Friday, Schwab wrote that the actions it took reflected its desire to ensure that Schwab and its clients’ assets were safeguarded from risk.

“Michael Kelly’s investment advisory relationship with Schwab was profitable for Schwab. So why did Schwab terminate its relationship with Kelly? Schwab terminated its relationship with Kelly because its priority is safeguarding customer assets and Schwab believed Kelly’s behavior posed an unacceptable risk to clients and Schwab.”

Schwab cited Kelly’s uncooperative, argumentative behavior when dealing with its compliance department and a six-month suspension of his CPA license for helping a client falsify tax returns as further justification for termination.

First contact

Kelly’s initial appeal to FINRA back in 2012 sought restitution for loss of revenue caused by the manner in which Schwab terminated his firm. But as the legal process dragged on, Kelly, who has represented himself pro se thus far, began to grow despondent at the strength of his opponent.

“Schwab strong-arms people, and I just don’t like it.”

So, “at some point of frustration on my part” Kelly says in early 2013 he hired a private investigator to find Arden Miller, the associate general counsel at Schwab who terminated him. In March, Miller received two letters from Kelly—one left at the front door of his home, the other on his car’s windshield while it was parked at Schwab’s Phoenix office. Kelly says he was just looking for answers and a sympathetic ear, but Miller and Schwab didn’t take it that way.

Claiming the contact was threatening, Schwab obtained restraining order protecting Miller, Miller’s wife, Bernie Clark, Chuck Schwab, Walter Bettinger, and other executives at the custodian, as well as an order keeping Kelly from contacting all Schwab employees. Schwab got a second restraining order in early 2014, after an investigator hired by Kelly parked across the street from Miller’s house, called out to him, and remarked that Miller had a new car. See: Why MSSB’s legal hardball in Idaho could bring overdue change to the Broker Protocol.

Fighting fire with fire

Schwab, in the meantime, hired a private investigator of its own.

Around the time Arden Miller was visited, the discount brokerage sent a P.I. to the homes of about 10 of Kelly’s clients and ex-clients.

According to Kelly, these P.I.'s showed up at night and told his clients they were investigating him. When asked for more specifics, the P.I.'s remained vague, saying they were there because of an action he had taken with Schwab.

Schwab’s investigators were looking for evidence that the clients who left Airgead Clann after its termination did so for reasons other than Schwab’s letter. This would have diminished whatever penalty the American Arbitration Association set if it ruled in favor of Kelly, he adds.

Final signer

Schwab has its own version of events. “The clients who were interviewed told the investigator their decision not to follow Kelly was unrelated to the letter they received from Schwab announcing the termination and its contents. Some told the investigator they had other independent reasons for deciding not to stay with Kelly,” a spokesman wrote.

Michael P. Kelly: I’d probably take a dollar and a signed admission to the entire advisor community that this is what they do.

Although Kelly lost the American Arbitration Association decision, with what he says is recently unearthed information in hand, he hopes Schwab will have to reach a reckoning for the way in which it terminates small advisors and the distress this causes their clients.

The crux of Kelly’s current appeal is that Bernie Clark perjured himself when he claimed in a January 2014 deposition for the American Arbitration Association that Schwab does not consider economic factors when deciding which advisors to terminate. That exchange is excerpted below:

Michael Kelly: In the event of a compliance issue that is exactly the same between two advisors, hypothetical, the only difference between the advisors is the level of assets under management. Are they going to be treated any differently in the termination procedure?

Bernie Clark: Assets under management has nothing to do with a decision like this.

Michael Kelly: So if, hypothetically, the exact same circumstances were to have occurred that occurred with me—the one alleged incident of an impersonation had occurred with an advisor with $1 billion under management would have ended up receiving the same letter?

Bernie Clark: Economics and assets do not factor into the determination.

When Kelly asked Clark during the deposition if Schwab still maintained that these figures were entirely irrelevant despite being in all e-mails, Clark said that indeed they were.

“I am a licensed officer of our industry” he said, “and when a potential wrongdoing is taking place, if I were to consider any economic value of the relationship in that decision, I would be at fault. I do not do that. And I am the final signer.”

The largest advisor Schwab terminated in those three years had $216 million in managed assets. This does not represent a profile of Schwab’s advisor network and Schwab did not answer a question from RIABiz asking why terminations skewed towards smaller advisors.

But Kelly’s appeal doesn’t just argue that Schwab treats smaller advisors harshly, it claims the biggest RIAs are given, allegedly, extraordinary leeway by the same compliance department. He was able to bring to light three instances in which billion-dollar advisors were treated with leniency despite very serious compliance problems.

First, the appeal cites a compliance case involving a client impersonation at First Foundation, an Irvine, Calif.-based RIA. Schwab discovered two forged signatures on wire transfers with requests for material amounts, but the RIA’s chief compliance officer is quoted in the appeal saying, “Schwab allowed us time to work through the issues in house.” At the time, this RIA had $2.9 billion under management with Schwab — about 200 times what Kelly had when Schwab noticed an unusual signature on his client John Colt’s ACH transfer request.

Finally, the appeal cites BSW Wealth Partners, a Boulder, Colo.-based RIA currently managing more than $800 million. According to the appeal, Schwab’s compliance team discovered that a rep at the RIA had conducted “multiple suspicious withdrawal requests” of client’s money going back years, including one for $70,000. After a two-year investigation, the representative was dismissed. Schwab did not sever ties with the firm.

Impersonating an RIA

Drew Simon: The veracity of claims by anyone who falsely impersonates others should be very suspect, and indeed, his claims about BSW are distorted and false.

In separate e-mails to RIABiz, BSW and a Schwab spokesmen dispute the claims made in Kelly’s appeal.

“Recently, Mr. Kelly engaged in a scheme in which he impersonated a senior executive of a reputable investment advisory firm without that individual’s knowledge or consent,” a Schwab spokesman wrote. “While impersonating this RIA executive, he contacted Schwab employees and other independent investment advisers in an effort to deceive them into providing confidential information about compliance practices that he could manipulate to use in his appeal. The claims are bogus and we’re confident they will be thrown out.”

BSW’s managing principal, Drew Simon, wrote along similar lines.

“What we are able to share is that Mr. Kelly was introduced to BSW by Schwab and by himself as someone else; that is, he was impersonating another individual. The veracity of claims by anyone who falsely impersonates others should be very suspect, and indeed, his claims about BSW are distorted and false,” he told RIABiz.

BSW did not respond when asked how it could tell it was Kelly on the other end of the phone line. Schwab told RIABiz, “We have direct evidence that Mr. Kelly impersonated [Cross] in an effort to extract information from Schwab. That evidence is part of an ongoing criminal investigation and will be made publicly available in the course of legal proceedings.”

Police at the door

Kelly vehemently denies he ever contacted these RIAs or any other employee at Schwab after the original restraining orders were filed against him. He says he learned most of the details of this alleged scheme a couple weeks ago when the police knocked at his door.

The Ventura County Sherriff’s department police told Kelly the reason for their visit: A man who identified himself as Craig Cross, co-founder of the $4 billion RIA Halbert Hargrove, had called, e-mailed, and approached a couple of Schwab employees. The same individual had also contacted the three RIAs mentioned above. Schwab had alerted local police because it said it believed this person was Michael Kelly making contact in violation of his restraining order.

Kelly invited the officers inside and told the whole story of his battle with Schwab. He adamantly denied, again, that he had been the individual impersonating Cross. Kelly says the police knew the order only applied to Kelly himself and not agents under his control and they left satisfied. He believes the police visit was another of Schwab’s blatant attempts to intimidate him.

Schwab initially declined to answer most questions for this article but did comment that Kelly “is currently the subject of two restraining orders in California and Arizona for harassing Schwab employees, and a third for threatening an attorney who took his deposition in an unrelated case and he is also under an active police investigation in Ventura County related to concerns over possible criminal activity.”

The police investigation Schwab refers to is the one described above. An officer at the Ventura County Sherriff’s Department said he could not say whether or not an active police investigation was taking place.

A lawyer who represented Farmer’s Insurance Company after a dispute over a claims reimbursement filed the third restraining order mentioned by Schwab against Michael Kelly in March 2013.

The real Craig Cross indicated through a spokesman that he played no part in the events described above.

Schwab insiders quoted

Schwab’s list of terminated advisors

Although Kelly denies impersonating Craig Cross, quotes from recorded conversations between Schwab employees and the fake Cross appear in his appeal. They are largely private admissions that small advisors are discriminated against at Schwab.

Jonathan Beatty, senior vice president in advisor services at Schwab, is quoted saying in the appeal: “Small I/A’s, for example I/A’s with $15M AUM, are not given the same attention as advisors with $1 billion of AUM.”

Michelle Thetford, vice-president of compliance at Schwab, makes a similar statement. “Schwab does not dedicate the same resources to working through compliance issues with small advisors,” she is quoted as saying.

Meanwhile, a court date ordering Michael Kelly to respond to Schwab’s impersonation accusations has been set for Dec. 17.

Olive branch

Kelly filed a whistle-blower complaint against Schwab with the SEC on Nov. 14 based on his new allegations of compliance favoritism. Even if he fails here and in court, Kelly hopes to get the word out about his experience with Schwab to other advisors around the country.

As for his own cases, after a three-year, knockdown, drag-out fight with Schwab, Kelly insists that it’s the principle that matters most.

“I’d have to think about it a little, but I’d probably take a dollar and a signed admission to the entire advisor community that this [arbitrarily terminating small advisors] is what they do,” Kelly says.

In fact, he made that exact settlement offer a year ago but was turned down, Kelly adds. Schwab’s current motion before the court asks that the most recent arbitration decision become final — if it does, Schwab would be awarded over $33,000 in legal fees.

Mention of Morton Capital was taken out of the article. The company says that though they are mentioned in the pleadings that it never had issues with Schwab.

Schwab Spokesperson said:

A copy of the complete set of facts we provided to RIABiz regarding this story is available here:

http://www.aboutschwab.com/press/statements/11.21.2014

Mister RIA said:

November 24, 2014 — 9:30 PM UTC

I wonder if Schwab knows how this makes them look? They should have been nicer.

INORIAS said:

November 25, 2014 — 1:38 PM UTC

Why didn’t Kelly move his assets to TD Ameritrade, Fidelity, Pershing or any other custodian? Only $14million in AUM and three years fighting a compliance issue doesn’t make sense. This makes him look foolish (Pride must have gotten the best of him), not Schwab.

Jim Tucker said:

November 26, 2014 — 6:20 PM UTC

This reminds me of the movie: Valdes is Coming. While I’m sure Mr. Kelly has some culpability, Schwab is the one really at fault here. There is an obvious pattern that can be gleaned from the compliance data above. It doesn’t take a rocket scientist to figure this out. So smaller firms have a more lax compliance policy than larger firms? Oh, please! One would expect the opposite to be true based on scale alone. Good thing Schwab now has a PR nightmare on their hands. That they have stooped to this level speaks volumes of how they view the RIA community. Regardless of whether the firm is large or small, the RIA community should be on notice that this can easily happen to one of them and their clients.

Kudos to RIA Biz for publishing these pieces. Keep us posted on whether Schwab’s sweet dreams of jail time ever manifest. Good luck on that one! I sincerely hope that RIA firms in general learn from this and review their cozy relationships with the Big Three (Schwab, Fidelity and TD Ameritrade). I’ve never understood why an “independent” RIA would get into bed with these firms in the first place when there are solutions available to the marketplace that provide equal clearing, software solutions, etc. Sure there’s the name recognition, but doesn’t a client decide to do business with you due to the value/philosophy that you bring to the table? And why get into bed with a company that directly competes with you through their own adviser sell-sides?

Good luck Mr. Kelly. I’m in your corner as I hope are many others.

Jim Tucker said:

November 26, 2014 — 6:21 PM UTC

This reminds me of the movie: Valdes is Coming. While I’m sure Mr. Kelly has some culpability, Schwab is the one really at fault here. There is an obvious pattern that can be gleaned from the compliance data above. It doesn’t take a rocket scientist to figure this out. So smaller firms have a more lax compliance policy than larger firms? Oh, please! One would expect the opposite to be true based on scale alone. Good thing Schwab now has a PR nightmare on their hands. That they have stooped to this level speaks volumes of how they view the RIA community. Regardless of whether the firm is large or small, the RIA community should be on notice that this can easily happen to one of them and their clients.

Kudos to RIA Biz for publishing these pieces. Keep us posted on whether Schwab’s sweet dreams of jail time ever manifest. Good luck on that one! I sincerely hope that RIA firms in general learn from this and review their cozy relationships with the Big Three (Schwab, Fidelity and TD Ameritrade). I’ve never understood why an “independent” RIA would get into bed with these firms in the first place when there are solutions available to the marketplace that provide equal clearing, software solutions, etc. Sure there’s the name recognition, but doesn’t a client decide to do business with you due to the value/philosophy that you bring to the table? And why get into bed with a company that directly competes with you through their own adviser sell-sides?

Good luck Mr. Kelly. I’m in your corner as I hope are many others.

Fredrica & Ronald Gross said:

August 20, 2017 — 7:58 PM UTC

My husband had a $12,000 windfall from S/S in 2011. Michael Kelly was our accountant. He said don't worry about I'll work it out. When we received our return hechadvput in $4500. IRS contribution. My husband was too old and I had a 401k at work. We questiond him and again he said not to woor about it. It was fiduciary obligation to advise us more professionl. Now for six years we have been paying $80 monthly to the IRS for taxes, penalty and interest. He would take no responsibility.

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